Article

How Mutual Funds Work in India
June 07 , 2012

Structure of Mutual Funds

Unit holders: The Mutual Fund Shareholders, like the other share holders have the right to vote. The voting rights include, the right to elect directors during the directorial elections, voting right to approve the alterations investment advisory contract pertaining to the fund and provide approval for changing investment objectives or policies.

Trustees: The Board of directors supervise the functional activities, which include approval of the contract Asset Management Company and other various service providers. Trustees appoint the custodian of the fund. They are appointed by SEBI.

Asset Management Company: This body handles the mutual fund portfolio as per the objectives and policies mentioned in the prospectus of the mutual funds.

Sponsors: Sponsors are promoters of the mutual fund. They raise money from unit holders which is invested in securities. Sponsors appoint trustees.

Custodian: The custodians protect the portfolio securities. Mostly qualified bank custodians are used for mutual funds. The custodian settles securities transactions for the fund, collects interests and dividends paid on securities and records information on stock splits and other corporate actions.

Transfer Agent: Transfer agents are required for the purpose of maintaining records and similar functions. The maintenance of the shareholder's accounts, calculation of dividends to be disbursed, sending information to the shareholders about the account statements, notices, and income tax information. Some transfer agents send information to the share holders about the shareholder transactions and account balances. They also maintain customer service departments in order to cater to the queries of the shareholders.

How mutual funds work

AMCs have experts in their team who create a list of shares and other securities like bonds, money market instruments that are expected to do well. The list typically will have 15-20 shares. This list is known as mutual fund scheme. All you need to do is choose any of the schemes offered by various asset management companies and put your money in it. They will collect the money from you and in turn will invest in shares specified in the mutual fund scheme. 

Each mutual fund scheme will have a manager and he is called the fund manager. The fund managers based on their research decide how much of which stock has to be picked for a fund. At the end of every month the funds performance is published along with the list of stocks they have invested in. This information is called as fact sheet.

For this activity they charge fund management fees. Fund management fee varies from 1% to 2.5%. It is known as expense ratio and is directly charged from your investments. The management fees covers all the costs of the asset management company including salaries, office rent and maintenance, advertisement, distribution, servicing etc. Fund management fee is charged irrespective of whether the scheme makes money or not.

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